After Sinking Nearly 30%, This Top Dividend Stock's Yield Is Approaching 4%. Time to Buy?

Shares of ConocoPhillips (NYSE: COP) have sunk almost 30% over the past year. The primary factor weighing on its stock has been falling oil prices.

On a more positive note, the oil stock's slump has pushed its dividend yield up closer to 4%, well above the S&P 500's sub-1.5% yield. Here's a look at whether now's a good time to buy ConocoPhillips for dividend income.

Image source: Getty Images.

A leading low-cost oil producer

Oil prices have a major impact on the cash flows oil companies produce. However, some companies are in a better position to navigate oil price volatility than others. ConocoPhillips is one of those companies.

On the first-quarter conference call, CEO Ryan Lance stated:

ConocoPhillips is built for this [periods of market volatility], with clear competitive advantages. We have a deep, durable, and diverse portfolio. We have decades of inventory below our $40-per-barrel WTI [West Texas Intermediate] cost-to-supply threshold, both in the U.S. and internationally.

He noted that in a world with "haves" and "have-nots," "we believe we are the clear leader of the 'haves,' and we have a disciplined capital allocation framework that is battle-tested through the cycles."

The company's low-cost operations enable it to produce a lot of free cash flow. For example, it generated $5.5 billion in cash flow from operations and $2.1 billion in free cash flow in the first quarter. It also has a strong balance sheet, with $7.5 billion in cash at the end of the first quarter. The company's robust free cash flow and balance sheet strength enabled it to return $2.5 billion to investors during the first quarter, with $1 billion paid in dividends and a repurchase of $1.5 billion of its stock. ConocoPhillips tapped into its strong balance sheet to repurchase more shares in the quarter because it believes "our shares represent a very attractive investment at these prices," Lance said on the call. The company clearly believes its stock is a good buy right now.

Ample fuel to grow shareholder value

ConocoPhillips expects to produce even more free cash flow in the future. Lance stated on the call: "We are on the cusp of a compelling multiyear free cash flow growth trajectory, led by our high-quality longer-cycle investments in Alaska and LNG [liquefied natural gas]. This underlying improvement in our free cash flow will structurally lower our breakeven and increase our capacity to return capital to shareholders."

The company estimates it will produce $6 billion in incremental free cash flow by 2029, assuming oil averages $70 a barrel, fueling sector-leading growth during that timeframe. A big driver is its $8 billion Willow project in Alaska, which will produce an average of 180,000 barrels of oil per day at its peak after it comes online in 2029. The company also has several LNG-related investments that will help fuel additional growth over the next few years, including projects in Qatar and along the U.S. Gulf Coast.

The growing cash flows from these projects support the company's dividend growth strategy. ConocoPhillips aims to deliver dividend growth in the top 25% of companies in the S&P 500 in the future. It has been growing its payout at a more than 10% annual rate in recent years, including by 34% last year. The oil giant also plans to buy back more than $20 billion of its stock over the next few years.

A high-octane dividend

ConocoPhillips offers investors an attractive dividend that's approaching a 4% yield because of its sinking stock price. It expects to grow that dividend at a leading rate in the future, fueled by its robust cash flow growth profile. That combination of yield and growth makes it look like a top dividend stock to buy right now for those seeking an attractive and growing income stream and meaningful stock price upside potential.

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Matt DiLallo has positions in ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.